Labor’s Property Investment Twist

The housing market over the last few years has seen a steady rise in pricing and presented a plethora of investment opportunities for investors. The problem is, with the prices being so high, the number of first-home buyers has declined, resulting in more and more young people turning to renting instead.

With 1 in every 7 house purchases being from first-home buyers, Bill Shortens Labor Government has proposed a new policy that is aimed towards essentially trying to make housing more affordable. The controversial policy has to do with abolishing negative gearing as well as the halving the capital gains tax.

The history of negative gearing

Just before we take a look at the details of Labors new policy, we should take a look back at the origin of these laws. Negative gearing has been around for almost 100 years but the most notable change to this law was under Bob Hawkes Labor in 1985. It was announced that property loss could now offset wage income – whereas prior, the negative gearing interest expense was quarantined, and you were only able to claim it against rental income exclusively. This was implemented in the hopes that more houses would be built and purchased.

This policy was scrapped several months later, however, and the negative gearing rule was reverted to its old state. It wasn’t until 1987, where treasurer Paul Keating pushed for the reverse of this decision and if an investor made a loss they were once again able to reduce the tax from their other incomes.

Where does capital gains tax come into it?

Capital gains tax is often associated with negative gearing, but they are two different things. Capital gains tax (CGT) is when 50% of the profits you’d make from selling an investment property – provided you’ve owned it for at least a year – don’t need to be taxed. This was introduced in 1985 under Hawkes Labor government, a few months after they initially made the changes to the negative gearing policy. This encouraged more people to invest in properties as it held a great incentive. If you sold a home for $100,000 then you’d only need to pay tax on $50,000 of that amount.

What is Labor proposing now?

So, what is Shortens Labor party proposing if they win the upcoming election? Well, it’s simple. To make things easier for first-home buyers, the Labor party – if elected this year – are moving their crosshairs to property investors through means of targeting tax breaks. They will be cutting negative gearing and restricting it for investors who have purchased properties after a particular yet-to-be-determined date. In addition to this, they have also moved to cut the CGT from 50% to 25%, making the CGT a little less desirable as they’ll have to pay tax on more of their capital gain.

The hidden angle in this new policy, however, is that if you’re already a property investor, then you will not be affected. If you already own property from before the yet-to-be-proposed date, then you’re still entitled to the 50% CGT cut as well as the full benefits of negative gearing.

What does this mean for the future of the housing market?

Whilst the motivation behind this policy is to support first-home-buyers and deter future property investors, this new move has been met with both criticism and praise.

UBS’s Chief Economist, George Tharenou, said “My concern would be that if you were to make a material change to tax policy at the same time as banks are tightening lending standards, it could exacerbate what’s already a downturn into something more serious.”

On the other side of the argument, the Tax Institutes senior tax counsel, Professor Bob Deutsch, has argued that now is the best time to introduce the change.

“When interest rates are as low as they are at the moment, people positively gear and many of them do so because the rent exceeds the interest. Fewer people will be impacted in the current market,” he said.

Ultimately, those with large, already established property portfolios will not be disadvantaged by this new policy as they will still be able to utilise negative gearing and claim the CGT. It’s the newcomers that will have to deal with the lessened tax benefits that come with owning multiple properties. Whether or not this will drive housing prices down to be more affordable is yet to be seen.